How to use liquidity cycle to find explosive moves

There is lot of confusion between liquidity and float. Many are confused between liquidity and float. These are two separate issues. A low float stock can have very good liquidity and a gigantic float stock can have very poor liquidity. Liquidity in stocks is cyclical. A low liquidity stock can become very liquid once there is a catalyst. Same way a highly liquid stock can become illiquid if it goes in to neglect phase due to lack of catalyst. Price breakouts followed by liquidity breakouts on stocks with multi month neglect  is a highly profitable strategy.

Let us look at some examples of this. 

Here is a stock which just few weeks ago was a stock which had extremely low liquidity. It often traded less than 1000 shares a day. 

Here is the same stock after a catalyst arrived :

In last 10 days the stock has traded on an average 783000 shares. 

Here is another example of a stock with very few low liquidity few months ago:

This stock traded less than 100000 shares per day till it had a liquidity breakout.

Now this same stock has traded on an average 845000 shares in last 10 days. Which is 8 times more than its average liquidity just few months ago. 

Here is another stock which had below 100000 liquidity just few months ago,

In last 10 days the same stock had average liquidity of 250000.

You can see examples after examples of this if you study stocks up 100% plus in a year. A study like that will show you that liquidity in a stock is cyclical. If a stock is neglected by market it will have very low liquidity and it can continue to be in that low liquidity phase for months or years. Then when something changes either in its business or in external environment it surprises the market by coming out with good earnings or new product news or some game changing catalyst. This results in a explosive move. This is a continuous phenomenon in the market. Unknown and little followed stocks will be the next big winner.

Many traders have never thought through how much liquidity they really need to trade. They set their liquidity requirement in their scans at high enough level that such stocks will not show in their scan. Many traders use average 50 days liquidity in scanning condition. Such condition will never catch a explosive move in a stock which had low liquidity prior to breakout. That is one of the reason there are profitable opportunities for traders who think through the problem and understand how liquidity changes over a life cycle of a stock. Look for liquidity breakouts. There is a big edge in such stocks for small speculators. 

The day to day liquidity in a stock is cyclical. When a stock with low liquidity has catalyst and get discovered by the market, liquidity comes in within days. If you see the earnings breakouts day in and day out, you will see this phenomenon again and again. A stock will be trading minuscule number of shares per day for long time probably months or years and then earning acceleration happens, suddenly liquidity will surge in and the liquidity will persist for weeks or months or years.

If you sort the "Common Stocks" list by volume and look at stock with very low volume you will see many stocks with 100 million plus float but that have no trading volume. Some will trade less than 100 shares in a day. The same stock that has been trading minuscule number of shares per day can quickly become liquid stock if a catalyst like earnings or something appears. There will be "Episodic Pivot" and then liquidity will just explode and persist for months or years.

If you go through all the stocks that make 100% plus move in a year from their 52 week low and compare the stocks liquidity 1 or 2 years prior to its 100% plus break, in cases after cases you will see the stock was trading minuscule number of shares per day and when it starts moving up liquidity follows. Price growth brings liquidity.

This happens day in and day out in neglected/virgin stocks. Stocks fall in to markets dustbin, liquidity dries up those stocks get neglected for long periods. A catalyst arrives and boom volume and trading liquidity arrives. If you use a liquidity filter set to very high level, like most traders do, you never catch such breaks.

Many traders have set their liquidity filter at such high level that they don't even look at some of the best opportunities in market. So many people use filter like Average Volume for 90 days should be above 500000. The filter ensures that the best opportunities in the market get eliminated.

The implications are clear for someone who studies this in detail and understand it. It can help you improve your returns, if you can catch start of a new liquidity cycle. Scan to a liquidity break on stock with below average liquidity. That often signals start of a enduring long term trend. If you are trading short term strategies or day trading understanding the liquidity cycle can help you design so many strategies. Many successful day trading strategies are based on a very simple understanding of these intra day liquidity cycles. There are lot of academic studies that have studied this phenomenon and they show the returns on low liquidity stocks tend to be higher than the returns on high liquidity stocks.

If you want to understand liquidity cycle then understand Stock Turnover Ratio. Stock Turnover Ratio is a measure of 10 day average volume/float. If a stock has higher float turnover ratio it means bigger price swings. Stocks with higher Turnover ratio are in demand. That is why IBD puts that table in the newspaper every Thursday which shows Stock Turnover Ratio. 

IBD will every Thursday publish a small table with stocks with high float turnover ratio.

This table uses Float Turnover to highlight these stocks. If you attend one of the advance courses from IBD, then sometime they talk about this and how they use it to scan stocks in their database.  As a general thumb rule if a stocks float turnover ratio increases significantly, it shows higher demand for stock. That is why NFLX and RVBD are highlighted in that table. But as the fine print says, the Float turnover ratio is not a reliable indicator of future moves. A stock which topped out and is going lower can also have very high float turnover ratio. 

What is  Stock Turnover Ratio or Float Turnover Ratio? 

Stock Turnover Ratio= average 10 day volume/float

Let us take a stock like say JKS. 

It has a float of 10 million. The average volume of  last 10 trading days is 1909520 as per Yahoo finance.

JKS Float Turnover Ratio= 1.9m (avg 10 day volume)/10m float=0.19=19%

What this means is that 19% of the float is turning hands everyday. So there is lot of demand for stock.

Now let us look at float turnover for say QCOM. 

The average 10 day volume is 19.4 million. The float on QCOM is 1573 millions.

QCOM float turnover= 19.4/1571= .03 =3%.

What it means is 3% of float is turnings hands daily. Which shows lower demands for shares. In other words there is 6 times more demand for JKS compared to QCOM. Stocks with high Stock Turnover Ratio are stocks in play or in demand and for active short term trader they offer lot of opportunities on both long and short side. Stock Turnover ratio above 10 is a indicator of good demand. High Stock Turnover Ratio above 30 can help you find very explosive moves. 

Scan for Stock Turnover Ratio if you want to find stocks starting their liquidity cycle or if you want to find stocks in play. The Stock Turnover Ratio is also very helpful for finding shorts. Stocks Turover Ratio will reach a peak prior to tops in market. Excessive Stock Turover Ratio is often a indicator of climax runs in stocks. A high Stock Turnover Ratio with no major price change can also indicate tops or bottoms. 

This kind of analysis is called liquidity cycle analysis. Understanding liquidity cycles can give you confidence to trade small and neglected stocks. If you want to trade earning breakout, it is extremely critical to understand this, the trade works because previous to the earning surprise there was no liquidity. Once you buy liquidity comes in as several others and funds who understand earnings importance join in immediately. The liquidity will persist post the breakout if in market participants collective judgment that stock has long term potential. Management will add liquidity by releasing more shares through secondaries or insider sells or through stock splits.

Within matter of days a small and risky stock with low volume will become a liquid stock with several thousand shares traded per day.Sometime this will happen within minutes of earnings announcement and it will persist for months. That is how liquidity works in market and that is why I am not scared of trading small stocks with big catalyst or big price increase or 100% growth because I know liquidity follows price growth.

Many traders have never thought through how much liquidity they really need to trade. That is one of the reason there are profitable opportunities for traders who think through the problem and understand how liquidity changes over a life cycle of a stock. 

Are you serious about your trading?

If you are serious about your trading and want to build an enduring edge the Stockbee Member site might help you. Members tell me they have tried lot of things before coming to my site and it has offered them the most extensive and detailed methods to swing and position trade.

It is only for those who want to develop their own self sufficient trading method. It is not a stock picking service. It is service for you to build your own scans and trading method to have your own daily pick based on your method.

Be warned it will take you time to learn to trade. Learning to trade is difficult art and unless you are willing to spend months or years to perfect your strategy and also develop your mental edge you are unlikely to succeed in this game. Unless you understand that no site, no service, and no mentoring is going to work.

Why traders come to stockbee?

The member site is one of the most recommended site for learning to trade by other traders and bloggers. You will see no advertising, no hard marketing, no promotions, no free offers, no affiliate marketing, no incentive to other bloggers to promote the site, no constant twits self promoting the site, no free trial  and no tall claims of making you instantly wealthy, and yet the site attracts new  members everyday. Members come from all walks of life and all kinds of trading size and trading styles.

You will see that many trading bloggers have been using my market timing methods, scans , stock ranking lists and chart templates. They have developed their own methods based on my methods. Many paid newsletter site recommend my site to their subscriber for learning about trading and market.

Over the years thousands of traders have been members and those who benefited from the learning talk about the site to others or talk about the methods used and that is how new members learn about the site.

What will I learn in the members site?

The members site will give you in depth understanding to develop your own trading method. The emphasis is on making you self sufficient and confident of your own trading method and style.

As a member you will learn the basics of swing trading, momentum investing, growth investing and risk management.

You will learn about Stockbee Trend Intensity Breakouts method that uses momentum based swing trading to find 3 to 5 day swing trades for 8 to 40% profit.

You will learn about Stockbee Episodic Pivots Breakout method which uses Post Earnings Announcement Drift (PEAD) to find stocks that had a game changing earnings and that are likely to rally for 3 months to 12 months.

You will learn about  Stockbee Dollar Breakout method that uses momentum, range expansion and swing trading approach to find 5 to 40 dollar moves in high priced stocks.

You will learn about  Stockbee Lemonade Strategy for 401k which uses market timing and momentum to invest in 401k. You will get weekly update on how I am using the strategy on our 401k to do allocation decision.

You will learn about Stockbee Market Monitor method for market timing using breadth. It allows you to avoid risky periods in market and allows you to identify market turns. It is used for 401k allocation decisions.

You will learn about Stockbee Double Trouble method to find stock with confirmed upside momentum using anchored momentum and that are likely to continue their up move.

You will learn about Stockbee Night Time is Right Time method to find news catalyst based trade ideas for short term day trade and swing trade.

You will learn about Investor's Business Daily’s IBD 200 list and how it can be used to find swing trading candidates for explosive moves.

You will learn about Telechart 2000 and how to use it effectively to scan for swing and position trade ideas and to set up your 401k strategy.

You will learn about Jesse Livermore Range Breakout, Darvas Box setup, and many other member shared methods.

You will learn how to set up your own scans, select right kind of stocks, how to set up stops, when to enter , when to exit, how much to risk, how to track your trades and all other details about trading. You will learn about developing your own methods and not relying on others for trade ideas.

The site has hundreds of videos and trading methods and variation of methods. Members help each other in developing the methods and share actively their research and finding. A collaborative spirit allows you to get input from others on your trading ideas or problems.

The site gives you opportunity to interact with some of the most successful traders and learn from them about their trading methods. It is a vibrant community with members from different background and experience willing to help each other. The emphasis is on continuous learning and up gradation of market knowledge and setup knowledge. The members range from hedge fund employees, financial advisers, active swing traders, investors and new traders.

If you are looking to develop your own trading strategy the membership site might be for you. You have to be willing to put in the effort to build your own method. There are no silver bullets offered on members site. Every method, every scan, every nuance is detailed and all possible help is offered to design your own method.

Do you have a trial?

If you are just looking for trial you are better off trying thousands of other trading sites that offer free trial or one month trial and offer you promise of riches.

It is for those who are ready beyond the trial phase and ready to put serious months or years  of efforts to learn to trade on their own. It is for those who want to learn to find their own fish.

The free blog has all the details about the methods I trade and if you go through the posts highlighted in the sidebar you will learn about them.

How can I become a member?

To sign up go to www.stockbee.biz and follow the sign up process. The site uses Paypal for payment processing.


No comments: